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Documentos de Profesional
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Theories of financial
accounting
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Objectives
Be able to describe various normative and positive
theories of financial accounting
Be aware of some of the limitations of the various
theories of accounting
Appreciate that there is no single unified theory of
accounting
Understand the various pressures and motivations that
might have an effect on the methods of accounting
selected by an organisation
Understand what is meant by creative accounting and
why it might occur
Copyright 2007 McGraw-Hill Australia Pty Ltd
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Theory definition
A coherent group of propositions or principles forming
a general framework of reference for a field of inquiry
Accounting theories explain and predict accounting
practice (positive theories) or prescribe particular
practice (normative theories)
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Agency problem
delegation of authority can lead to loss of efficiency and
increased costs
Agency costs
costs that arise as a result of the agency relationship
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price protection
monitoring by owners
bonding by managers
managers may be rewarded:
on a fixed basis
on the basis of the results achieved
on a basis that combines the two
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Role of auditor
If managers remuneration is based on accounting
numbers the auditor takes a monitoring role
The auditor arbitrates on the reasonableness of the
accounting methods adopted
Some research indicates that the greater the
separation between managers and owners, and the
greater the reliance on external debt (meaning greater
potential agency costs), the greater the likelihood that
voluntary financial statements would be undertaken
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excess dividends
claim dilution
asset substitution
investment in risky projects
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Contracting
interest coverage clauses
debt to asset clauses
Leverage clauses frequently used in Australian bank loan
contracts
Monitoring
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increased taxes
increased wage claims
product boycotts
decreased subsidies
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PAT in summary
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Criticisms of PAT
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Assumptions:
firms exist to increase the wealth of their owners
the ability to adapt to changing circumstances
capacity to adapt best reflected by current selling prices
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Systems-oriented theories
Systems-oriented theories
These theories focus on the role of information and
disclosure in the relationships between
organisations, the State, individuals and groups
The entity is assumed to be influenced by the
society in which it operates and to have an influence
on it
Systems-based theories include:
stakeholder Theory
legitimacy Theory
institutional Theory
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Decoupling
actual practices can be very different from formally sanctioned and
publicly pronounced processes and practices
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Summary
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Summary (cont.)
Normative theories of accounting
prescribe how accounting should be practised
argue typically that a central role of accounting theory is
to provide prescriptioninform about optimal accounting
approaches and why a particular approach is considered
optimal
examples: Conceptual Framework Project, current-cost
accounting, exit-price accounting and deprival-value
accounting
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Summary (cont.)
Systems-based theories
Include Stakeholder Theory, Legitimacy Theory, and Institutional
Theory
see organisation as firmly embedded within a broader social
system
organisation is considered to be affected by, and to affect, the
society in which it operates
accounting disclosures and particular organisational forms are
seen as a way to manage relations with particular groups
outside the organisation organisational activities and
accounting disclosures are considered to be reactive to
community pressureshow a firm operates and what it
reports must be determined upon consideration of various
stakeholder expectations
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Summary (cont.)
Theories that seek to explain how regulation is
developed
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